The Clorox Company held a Fourth Quarter Fiscal Year 2023 Earnings Release Conference Call, with the host being Ms. Lisah Burhan, the Vice President of Investor Relations. She was joined by Linda Rendle, the CEO, and Kevin Jacobsen, the CFO. During the call, they made forward-looking statements and referred to certain non-GAAP financial measures. Linda Rendle opened the call with a few comments and they concluded by taking questions. The company reported strong results for the fiscal year, indicating progress on their strategic priorities.

In the past year, the company has been focused on increasing top-line growth and rebuilding margins in a difficult environment, while still investing in long-term success. Their efforts paid off with a 4% net sales growth, a 360 basis point gross margin expansion, and 24% adjusted EPS growth. The company is continuing to invest in innovation, strengthening their brands, advancing their digital transformation, and streamlining their operating model to drive long-term growth and return to pre-pandemic margins. They are confident that these actions will enable them to increase market share and household penetration.

In Q4, Clorox saw better-than-expected volume performance due to higher elasticities and slower trade promotion normalization than expected, as well as better operational performance from their supply chain team. Linda Rendle noted that the team was able to make more supply than anticipated, and shipments to retailers were stronger than expected.

In Kingsford, the company made significant adjustments to the plan, which included working with retailers on category growth plans and having the right merchandising, which resulted in better than expected performance. For fiscal year '24, sales are projected to be between 2-4%, with mid-single digits in the front half and low single digits in the back half. This is due to a mild recession in the back half and the lapping of the fourth price increase in the middle of the year. Volume trends are expected to improve as the year progresses, and the benefit of price mix will be larger in the front half and tail off in the back half.

Linda Rendle explains that their fiscal '24 guidance is expecting flat to 2% net sales growth, which is slightly below their long-term algorithm of 3-5% annual sales growth. This year is expected to be a tale of two halves, with stronger growth in the first half and tougher conditions in the second half due to a mild recession. This guidance includes a 1 point headwind from their vitamins, minerals, and supplements business.

Linda Rendle speaks about how the plan has been re-engineered to focus more on profitability, with a 1 point headwind. The company expects normalization of elasticities, trade promotion, and a mild recession in the back half of the year. The company intends to spend 11% of sales on advertising in fiscal ‘24, which is higher than the 10% in fiscal ‘23. There is also an intention to get back to pre-COVID levels with promotional spending.

The company is targeting an 11% increase in advertising spending to support the consumer during the pandemic, and they have two data points that give them confidence in this decision. They have nearly met their goal of getting to know 100 million US consumers, which has led to the highest return on investment in their advertising. They are also ramping up promotions, but at a slower rate than expected.

Kevin Jacobsen addresses the question about the fiscal '24 guidance, which includes a lower gross margin than the back half of the year. He explains that the $200 million of higher costs is due to cost inflation, which was particularly difficult in fiscal year '22. He also explains that the goal is to eventually move back to pre-COVID gross margin levels, but that there won't be much progress in that area this year.

Clorox is expecting to experience $200 million of cost inflation this year, with a third of that coming from commodities such as chemicals, substrate, corrugate, and linerboard, and the rest coming from labor costs in manufacturing and warehousing. The company is aiming to rebuild its gross margin to pre-pandemic levels, expecting to improve an additional 150-175 basis points by the end of the year, which would be a total of 500 basis points recovered from the 800 basis points lost. Fourth quarter is typically the highest margin quarter.

Kevin Jacobsen explains that the fourth quarter is historically their highest margin because of the disproportionate amount of Kingsford business done in that quarter. He also explains that the second quarter is typically their lowest margin because of the lack of Kingsford business and the gift-packing on Burt's business, which is done to increase awareness but comes with a lower margin. He then goes on to explain that the first quarter will have solid progress, but not to the same degree as the fourth quarter due to the third round of pricing. Lastly, he states that there are no pricing assumptions for the upcoming year.

Clorox is continuing to focus on net revenue management activities and international pricing due to higher inflation rates. They have taken a hit in terms of volume and household penetration due to the four rounds of pricing increases, which has led to consumers engaging in value-seeking behavior and some light users leaving the category. Clorox is still in nine out of ten US households, but they are focused on returning household penetration over time.

In Q4, Kevin Jacobsen reports that the gross margin was just under 43%, which was higher than their expectation of 40-41%. The variance was mainly due to better top-line performance and volume, which only declined 2%. Cost savings, pricing, and commodities were generally in line with expectations.

Kevin credits the team for their hard work in cost savings and supply chain optimization, which has allowed them to absorb inflation and rebuild margin. Linda mentions that the confidence in the volume improvement is due to incremental advertising investment and other factors.

This paragraph discusses the trade-off between pricing and volume. It explains that consumers are still adjusting to pricing changes, and that there is cross-elasticity in their wallets due to the pandemic. However, data indicates that volumes are beginning to improve. Consumers will eventually return to their old routines since they are more efficient and effective.

Clorox saw light users return to the product due to reintroducing their products and advertising spend. They saw a growth in volume due to pricing increases, which was unprecedented for the industry. They believe that their brands are still a superior value compared to pre-pandemic and will return to more volume-based growth. Andrea Teixeira asked about the trade-off between shipments and consumption, and whether retailers were rebuilding inventory. Clorox mentioned that consumption was better than feared and that category behavior has been changing.

Kevin Jacobsen discussed the fourth quarter performance of the company, which was stronger than expected due to resilient consumer consumption and strong execution on Kingsford. The company also saw growth on a year-over-year basis due to retailers reducing inventory levels in the prior year. Jacobsen concluded that retailers generally have the right inventory levels.

Retailers have been selling products to customers without reordering from manufacturers, which has caused shipments to be closer to consumption compared to the previous year. This was particularly seen in the home care business, where inventory reductions in wipes led to a 14% growth in shipments. Elasticities, which measure how much demand is affected by a change in price, were lower than expected and lower than pre-pandemic levels. It is expected that elasticities will return to normal levels in the upcoming fiscal year, although there may be a mild recession in the back half of the year, which could put additional pressure on the consumer.

Kevin Jacobsen states that there is a $60 million headwind coming from commodity inflation, with substrate, chemicals, and corrugate linerboard being the main drivers. This inflation is partially offset by deflation in ag products, soybean oil, and diesel, while resin is expected to remain flat.

Linda Rendle provides insight into the investment cycle that many manufacturers are going through, with increased spending on advertising, SG&A, and marketing in order to increase volumes. This is a response to the volatility caused by COVID.

The company has invested in digital transformation and its operating model to become more consumer-focused and faster. They have also increased promotional spending to introduce consumers to innovation and remind them of their products. To ensure superior value for their consumers, they have increased their brand superiority to the highest level they have ever had.

Clorox had strong retail sales growth in Q4, including in tracked channels, PPD business, international, and non-track sales. Kevin Jacobsen suggested that these areas were even stronger than track sales, which showed strong growth. He suggested that Clorox should invest more in advertising and sales promotion to remind consumers of their household essential categories.

In the fourth quarter, Kingsford's organic sales grew 14%, while track sales consumption was at 7%. The difference between the two was due to international and PPD sales, which grew volume, and the lapping of wipes inventory. Non-track performance was strong in a number of retailers across e-commerce and brick and mortar.

The speaker is asking why the pace of gross margin expansion in fiscal '24 is slowing despite cost inflation being less of a pressure than last year and pricing largely working. They reference that fiscal '23 gross margin expansion was ahead of expectations.

Kevin Jacobsen explains that the company is working to rebuild gross margin back to pre-pandemic levels, expecting to make 150-175 basis points of progress this year. This is due to limited pricing in the plan, as well as cost savings and supply chain optimization. They are dealing with $200 million worth of cost inflation, but hope to more than offset it. They are expecting the progress to continue into fiscal year '25, but acknowledge that commodities can become deflationary at some point, which will accelerate the pace of recovery.

Linda Rendle explains that the $200 million in cost inflation is still three times the average before the current inflationary cycle. She also discusses the importance of innovation in rebuilding volume and how it is the lifeblood of their strategy. She mentions that they have launched innovation across their portfolio in the last fiscal year and would expect something similar in the upcoming year. They are focused on value and value superiority in their innovation and will be supporting it with 11% of sales from advertising and sales promotion.

Kevin Jacobsen states that the company is now entering a period of normalization, and that they have been lapping COVID waves and pricing. He does not see any significant inventory buildup that they need to lap in the near future.

In the past 18 to 24 months, the company has made good progress in terms of increasing shelf space and distribution points. For the upcoming fiscal year, the company is focused on gaining distribution on their innovation and making sure that they have the right SKUs and packs on the shelf to meet consumer needs.

Linda Rendle explains that the company has taken into account the expected category growth rates and adjusted their plans accordingly to account for any headwinds or tailwinds. They are also aiming to make progress on share over the long term.

Linda Rendle responds to Steven Powers' question about the company's top-line outlook, confirming that it is in line with category growth. She then answers Jason English's question about the possibility of rolling back prices due to a downturn in commodities, explaining that the company is investing in marketing and advertising instead of giving back relief in the form of pricing.

Kingsford has taken pricing increases that have stuck in the marketplace, but have not fully recovered margins due to an inflationary environment. They are planning to increase prices to bring back volume and household penetration through innovation, advertising, and sales promotion. They have adjusted to changes in categories by making short-term adjustments rather than rolling back prices, and have maintained truckload pricing.

Linda Rendle explains that they intend to manage pricing differently than they did a decade ago, using trade and flexing trade if necessary, rather than announcing and publishing price increases. Rendle believes that the price increases will stick and they have the right tools in place to do that. She also notes that they are focused on other levers such as spending and innovation to continue their strong top-line performance. The call then concludes.

This summary was generated with AI and may contain some inaccuracies.